Tuesday, July 1, 2014
In the Grip of the Octopus
With the introduction of the Boeing 787 and the A350 come new business models for Original Equipment Manufacturers (OEMs). In order to play a major role, or just any role at all in aircraft systems, OEMs must invest many resources and much effort in helping Boeing and Airbus design the aircraft systems through all the high costs of development. Under all the pressure, airframers argued that it would be much cheaper and easier if they only had to certify one system. The very moment that philosophy took root, airframers scored a deal; but, at the same time, they also killed the competition.
We all remember the time of Terrain alert Collision Avoidance Systems (TCAS). At that time, there was more than one OEM developing aircraft components. The competition between Honeywell, Rockwell Collins and Allied Signal was intense, but the end users (airlines) were very happy because they could negotiate good price of their Line Replaceable Units (LRUs). Now, in the case of the modern 787, you can’t do that — there is a single source and that’s it. Is the aircraft cheaper? Not really, but by doing that and sharing development costs, airframers created a new business environment. The OEMs now have to capture the aftermarket, which was traditionally in the hands of airlines, which were able to make some money doing maintenance.
Most big airlines had excellent and huge avionics shops, a lot of new technology, and a lot of outstanding technicians. It is a difficult task to compete with that system, which had been running for decades, and OEM’s had to plan carefully in advance and be very patient. But now, MROs are complaining, because they see and feel that they are losing ground in the cutthroat competition that is the survival of the fittest. While they once wanted the challenge, MROs are now recognizing the cost and find themselves in the grip of the octopus. The tentacles are strong and each one of them can strangle the MRO shop. Let me introduce you to the tentacles!
Tentacle number one is the diminishing content and accessibility of repair manuals. Although that reduction of content is not rampant, still OEMs have moved content to different chapters or even different books, which is very confusing. They also have the power to issue revisions almost every day. By the time the MRO incorporates the revision, the next revision is already on the shelf. But it is easy for the OEM to keep revising manuals, because the digital nature of distribution means they no longer have to print it and distribute physically. Just revise something, anything, and place it on the web. If you are the airline, you are allowed to use the manual only for your own fleet. Third party work is absolutely forbidden unless you arrange it legally via delegation letters. And it is not becoming easier. That means new costs, which are added to the costs of the MRO product, making that MRO less competitive.
Now, meet tentacle number two: high annual price escalation for LRUs and parts. If it is about SFE, then there is a limitation imposed by a Product Support Agreement (PSA). For BFI, it depends on the quality of your own contract. Again, it means, among other things, additional costs for MROs.
Tentacle number three is the poor delivery performance of the OEMs. It looks like a game and sometimes appears as a coincidence, but to me there appears to be a pattern. Lead times are long for everything. If you buy the new stuff, expect lead times of 240 to 360 days. It is the same with parts. And it is not getting better. Yes, tentacle three is the dramatic complication and additional costs for the MRO.
Tentacle number four: upgrading parts or making parts obsolete; this is a difficult one. Although there is an obsolescence plan required for each OEM, many times they don’t comply. If OEMs need more revenue, they declare a part obsolete and try to sell a new redesigned LRU, which is better (of course), more reliable (of course) and more expensive (naturally). The game can be played indefinitely. OEMs will of course oppose PMA parts or DER repairs. PMA parts are nowadays better than ever, but they are getting bad publicity. People who are not an engineer can easy decide to ban PMA parts and the little bit of competition against OEM will be extinguished. Nevertheless, MRO costs will again get higher as they can only use marked-up original parts.
Then there is the fifth tentacle: limited access to tooling, education and technical support. If you want to buy tooling, it is typically not put on the table. If you want a drawing, it is proprietary, and if you want to buy a drawing, they don’t have a price available. On the other hand, the training is not scheduled; instead, it is on request and there is always some problem, because you are the only one asking for training. Getting technical support is also a problem because you can’t get real people on the telephone line. You must send them an email, which will be responded to by a computer generated email or maybe even the email address will be unknown. If you fill out the form on their web portal, you will get a computer generated email saying that the job is in process. After several updates later, they will give you the wrong answer anyhow.
Tentacle number six is ensuring limited availability of alternative parts and repairs. This tentacle is difficult to manage. You know that there is a repair possible but CMM (Component Maintenance Manual) is forcing you to replace the part. If you want to do a repair, which is not described in the CMM, you must spend a lot of effort and money to get the approval for it. And after all that effort, your customer might not accept the repair or alternative PMA part. So you are cornered in your misery.
Tentacle number seven prevents increase of your own revenue by pushing for additional business or, in other words, OEMs increase the Turn Around Time (TAT) of repairs of LRUs and SRUs to force you to buy additional spares to fill the pipeline. The OEMs are also able to keep discussion about your quote or price of parts going just long enough that you find yourself regularly in an AOG situation. At a certain moment, you will decide to buy one more spare, just to manage the risk of AOG. But that is exactly what they want: to sell you additional spares.
The eight tentacle is all about creating barriers for third party work on intellectual property agreements, end users agreements and non disclosure agreements. License fees are always imposed for such third party work in addition. In the old days, you could buy hardware parts for your needs and for your customers. I can imagine that the OEM asks a fee now for sending a copy of software. Suddenly you need to buy a screw to repair the unit of your customer (not software, but a screw, thus hardware). It is not enough that you are charged for the screw, but they are asking the fee because it is the unit of your customer. So, they s---w you twice! Isn’t that strange? This is brand new for airlines and MROs, which are not used to do so much legal stuff.
Sometimes I regret that I am an engineer and not a lawyer. Lawyers are nowadays the kings and the queens of the company, and they don’t mind if they work for OEMs or MROs. They are making the policy, establishing the tactics and making the rules. Actually, they have all the fun. We engineers just suffer.
Every individual tentacle is capable of strangling you, just not very quickly. The octopus is just playing the game and seeing just how long you can suffer. If you have survived the stranglehold of the octopus so far, then you are on a good path. Shortly you will conclude that there is a partnership required if you want to survive, and perhaps even relax the stranglehold. When you think that the solution is the partnership with another MRO to create the greater magnitude and better negotiation position or the partnership with OEM to create both win situation, you will realize that you have become somebody who just suffers and generate money for the octopus.
To operate alone? It is not possible anymore, because the octopus is much stronger.